Here's How to Trade Stock Market Indexes, Utilities Despite Volatility

NEW YORK (TheStreet) -- Investors have difficult and different trends to navigate this week in a potentially stormy stock market featuring a full-blown correction in the Dow Utilities. However, despite the volatility, investors can trade the stock market using these three popular exchange-traded funds.

If you are trading the Dow Jones Industrial Average the exchange-traded fund to use is the SPDR Dow Jones Industrial Average ETF (DIA), or Diamonds. The daily and weekly charts will show that the technicals are negative for the Dow 30.

If you prefer to trade the Standards & Poor's 500 the ETF to use is the SPDR S&P 500 ETF (SPY), or Spiders. The daily and weekly charts for the broader average are neutral.

If you like to trade the tech sector consider the ETF whose components are in the Nasdaq 100, which is a sub-set of the Nasdaq Composite. This ETF is the PowerShares QQQ Trust ETF (QQQ). The daily and weekly charts for this ETF are positive, but that could change this week given downside market volatility.

Before we look at these charts, let's outline the difficult and different trends for six equity averages.

The Dow Jones Industrial Average ended last week with a negative weekly chart, but this was offset by Dow Transports rebounding out of correction territory. Transports has a negative but oversold weekly chart.

The S&P 500 ended the week with a neutral weekly chart with the index below its key weekly moving average, but with overbought momentum. The S&P 500 will have a negative weekly chart if the index ends this week below its key weekly moving average of 2,103.6.

The Nasdaq Composite and Russell 2000 ended the week with a positive but overbought weekly charts.

While not a major average, the Dow Jones Utility Average took a big hit last week. This average is down 8.9% year to date and is down 14% since setting an all-time intraday high of 653.21 on Jan. 29. Utilities are thus a drag and is in correction territory.

The overall technicals for the stock market will shift to negative given simultaneous weekly closes on June 12 below the key weekly moving averages of 18,023 Dow Industrials, 2,103.6 S&P 500, 5,028 Nasdaq, 8,608 Dow Transports and 1.247.85 Russell 2000, if all five momentum readings declining from the levels of June 5.

Here's the daily and weekly charts for the three exchange-traded funds we have been tracking.

Here's the daily chart for the DIA.


Courtesy of MetaStock Xenith

The daily chart show that Diamonds had a close of $178.50 on Friday with the ETF up just 0.3% year to date and below its 50-day simple moving average of $180.02. This indicates risk to the 200-day simple moving average of $175.91. Note that the 200-day SMA was tested at the Feb. 2 low of $170.10.

Here's the weekly chart for the DIA.


Courtesy of MetaStock Xenith

Diamonds ended last week on Friday below its key weekly moving average of $180.11 which is a negative close as weekly technical momentum declined to 74.25 from 80.76 on May 29. The 200-week simple moving average of $148.94 is the long term "reversion to the mean" last tested at $106.57 during the week of Oct. 7, 2011.

Investors looking to buy Diamonds should place a good till canceled limit order to purchase the ETF if it drops to $150.82 and $145.24 which are key levels on technical charts until the end of 2015.

Investors looking to reduce holdings should place a good till canceled limit order to sell the ETF if it rises to $183.91, which is a key level on technical charts for this week only.

Here's the daily chart for Spiders.

Courtesy of MetaStock Xenith

The daily chart shows that Spiders had a close of $209.77 on Friday up 2.1% year to date with the ETF just below its 50-day simple moving average of $210.07, with the 200-day simple moving average of $204.61. Note that the 200-day SMA was nearly tested at the Feb. 2 low of $197.86.

Here's the weekly chart for Spiders.

Courtesy of MetaStock Xenith

Spiders ended last week on Friday below its key weekly moving average of $210.56. Without a rebound this week the weekly momentum reading will likely decline below the overbought reading of 80.00. This week's reading is 82.66 down from 86.83 on May 28 but still overbought. The 200-week simple moving average of $165.57 is the long term "reversion to the mean" last tested at $114.40 during the week of Oct. 7, 2011.

Investors looking to buy Spiders should place a good till canceled limit order to purchase the ETF if it drops to $205.08, which is a key level on technical charts until the end of June. Lower key levels of $158.47 and $155.56 are on technical charts until the end of 2015.

Investors looking to reduce holdings should place a good till canceled limit order to sell the ETF if it rises to $215.72, which is a key level on technical charts for this week only.

Here's the daily chart for the PowerShares QQQ.


Courtesy of MetaStock Xenith

The daily chart show that the PowerShares QQQ had a close of $109.30 on Friday up 5.9% year to date with the ETF above its 50-day and 200-day simple moving averages of $108.35 and $103.76, respectively. Note that the 200-day SMA was last at $91.95 back on Oct. 17.

Here's the weekly chart for the QQQ ETF.


Courtesy of MetaStock Xenith

The weekly chart for the PowerShares QQQ is positive and its momentum reading nearly overbought. The ETF is just above its key weekly moving average of $108.95 with momentum rising to 79.90 from 78.68 on May 28. The 200-week simple moving average of $78.62 is the long term "reversion to the mean" last tested at $42.51 during the week of July 9, 2010.

Investors looking to buy the PowerShares QQQ ETF should place a good till canceled limit order to purchase the ETF if it drops to $105.64, which is a key level on technical charts until the end of June. A lower key level of $89.24 is on technical charts until the end of 2015.

Investors looking to reduce holdings should place a good till canceled limit order to sell the ETF if it rises to $113.10, which is a key level on technical charts until the end of June.

Investors not familiar with technical analysis should begin with the notion that a price chart for a stock shows a road map of past price performance, which provides guidance for predicting future share price direction.

Here's how to read a daily chart. There are two moving averages to follow; the 50-day simple moving average is in blue while the 200-day simple moving average is in green.

Here's how to read a weekly chart. This chart shows weekly price bars going back to the beginning of 2007 and thus includes the Crash of 2008, then the current bull market for stocks that began in March 2009. The red line tracks the ups and downs of the key weekly moving average. The green line is the 200-week simple moving average. The red line that oscillates along the bottom of the chart is the momentum reading on a scale of 00.00 to 100.00. A reading below 20.00 is oversold and a reading above 80.00 is overbought.

A technically positive weekly chart occurs when a stock ends a week above its key weekly moving average with the momentum reading rising above 20.00.

A technically negative weekly chart occurs when a stock ends a week below its key weekly moving average with the momentum reading declining below 80.00.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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